Wednesday, October 1, 2008

Greed

Ah, the great economic meltdown of 2008. Question: should our politicians step in and pass legislation to shore up Wall Street and the banking system? There are two schools of thought. The first is that Congress simply has to do something. They can't sit back and watch the country plunge into recession. The second is, hell, no, the bankers and brokers got themselves into this mess through their own greed so let them get themselves out as best they can.

I fall, somewhat reluctantly, into the camp that thinks something must be done. The problem with scenario two is that the pain won't be limited to the honchos who brought on the whole mess. It will trickle down (despite what the Republicans have always preached, money woes trickle down a lot faster than financial good fortune) to the rest of us.

So maybe you think, you have little or no money in stocks so what do you care? Well, because economic stress also means that if you want to buy a new car, your bank may have tightened up so much on extending credit, you won't be able to get a loan. Ditto, home improvements or money to send your kids to college or whatever else you need. If a local business fails due to the inability to obtain financing for its operations, it will eventually impact other businesses that depended on it. For instance, if a restaurant goes under, the vendors it bought its supplies from will feel the impact and a vicious cycle has begun. The failed restaurant's employees are already out of a job and now the vendor may have to lay off staff too. The affected workers will probably have a difficult time finding other positions if all the businesses in the area are retrenching. The snowball will just keep careening down the hill, catching us all up before it reaches the bottom.

So Congress may have to save them, the Mr. Bigs, in order to help save us. It stinks, but there you go. The best we can hope is that they give a thought to Main Street while they're saving Wall Street. Past experience doesn't give us much cause for optimism. Usually, our politicians give us the least amount of assistance they can get away with. Millions of people lost their savings during the Savings and Loan Crisis and it was, too bad so sad.

The Savings and Loan Crisis. Remember that? It hasn't been all that long ago. I believe it occurred during the Senior Bush administration. And maybe that's the real question we should be asking. Why is this allowed to happen over and over?

It was no big surprise that a lot of the S & L's went belly up. Turned out, they'd been making risky loans, taking flyers on deals that were nothing more than outright scams. They knew what they were doing but all that money was just so very, very tempting. Lots of others knew what was going on too, including congresspeople, but no one did anything about it until it was too late. Then it cost us taxpayers billions of dollars to try to shore up the system just like its going to this time.

And lots of people knew what was going on this time too. Even ignorant people like me could see that they were giving out mortgages that had no basis in reality. When I was a realtor back in the 80's, banks demanded 20 percent down (or at least 10 per cent with PMI insurance), they insisted that you'd been at your current job two years, they required a good credit rating and a sensible income to debt ratio and they were strict about how much money you could qualify for. All those rules went out the window at some point. Part-time beauticians were approved to buy $100,000 houses. You could start a job today and buy a house tomorrow. Down payment? We don't need no steenking down payment. There were even "no assets-no income" loans, called, appropriately, ninja loans. There was so much demand, real estate prices just kept going up and up and that was really nice because it enabled you to borrow on your equity and keep right on spending.

Why didn't banks care? Because they no longer held those mortgages so it didn't matter to them if they were defaulted or not. They were bundling them together in blocks and selling them off to other institutions. I was working at the Sheriff's Department when the handwriting started appearing on the wall. The number of sheriff's sales I scheduled doubled, then tripled, because of all the foreclosures. People were losing their homes at an alarming rate but you know, when it is Podunk burning, the politicians just keep on fiddling.

But then Podunk turned into Rome. It wasn't Joe Sixpack who was teetering on the edge of bankruptcy anymore. Now it was Lehman Brothers and Merrill Lynch and Wachovia and oh, my God, Fannie Mae and Freddie Mac! And that's where we are now, with a panicked Congress rushing around like a headless chicken trying to decide what to do.

But the larger question still is: why was this allowed to happen? Wise people could see it coming from a mile away. Why were our financial institutions allowed to go on an orgy of greed, with their top people collecting gazillions in pay and stock options while the stock markets just kept going up and up. Why were there no regulations in place to stop such behavior before it put the country into such a terrible position, a position that will cost taxpayers this time $700 billion?

And an even larger question is: will we do anything to ensure it doesn't ever happen again?